Wednesday, May 21, 2014

I back the MMT permanent zero interest rate policy.

With economies recovering from the crisis, the robots who make up much of the economics profession are calling for or contemplating a rise in interest rates. E.g. see here.Their basic reason being that central banks have always aimed for a positive rate, ergo they always should. Likewise ancient Egyptians doubtless also arged that Kings and Queens have always been buried in million ton pyramids, therefor they always should be. Similar robotic behavior is found in all cultures of course.

A permanent zero rate was advocated by Warren Mosler – see 2ndlast paragraph here.I assume other MMTers think likewise, though I might be wrong there.

Anyway the actual arguments for a permanent zero rate are as follows.

Household spending is related to how large a stock of money households have: e.g. when people win a lottery their weekly spending rises (revelation of the century that, wasn’t it?). Or to be more accurate, aggregate spending is related to what MMTers call “Private Sector Net Financial Assets” (PSNFA). And the latter is made up of base money plus national debt.

Those two, base money and national debt are actually very similar: at least they merge into each other. That is, there is no effective difference between short term debt that pays a near zero rate of interest and base money.

Commercial bank created money, in contrast, is not a “net asset” because for every dollar of such money there is an equal and opposite debt. That is commercial bank created money nets to nothing.

To summarise so far, spending is positively related to PSNFA. Thus one way of regulating demand would be to regulate the amount of PSNFA.

But another possibility would be to have too large a stock of PSNFA while inducing the private sector not to spend it to the extent that they otherwise would by having government pay interest to PSNFA holders in exchange for lending to government, or “lodging PSNFA” with government to put it another way.

But what’s the point of that? I.e. what’s the point of so to speak distributing Monopoly money to the population and theninducing them not to spend it by having them lend it back to government? That is totally insane.

That is not to say that interest rate hikes should never be used to damp down demand (especially in emergencies). But certainly, the long term objective should always be a zero rate.

But even the latter use of interest rates in an emergency is debatable in that the evidence seems to be that interest rate adjustments have little effect. See hereand here. But of course pyramid builders, economists and other robots don’t like empirical evidence that contradicts their long held beliefs.